John Hussman warns of poor S&P 500 returns over the next 12 years. High valuations suggest potential underperformance versus U.S. Treasuries. Mr. Hussman’s past predictions include accurately predicting the crashes of 2000 and 2008.
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Before investing in the stock market, John Hussman advises investors to keep in mind that the probability of a return outcome ultimately depends on when the purchase is made.
The average annual return for the S&P 500 since 1957 is 10.5%, but these average returns are not earned no matter when you enter the market.
“It’s like walking into a house with two rooms, one at 0 degrees and one at 140 degrees, and expecting it to be 70 degrees either way.” 2000 and a 2008 crash, according to an Oct. 17 memo.
Case in point, if you bought on February 14, 2020, you would have appreciated 71%. But if you had bought just a month later, at the bottom of the pandemic crash on March 20, you would now be up 152%. There is no doubt that both are great results. But they are very different. Also, in business cycles where monetary and fiscal stimulus is less strong, markets may take longer to recover.
Hussman said several different variables currently indicate that if an investor invested in the S&P 500 today, they would expect a poor outcome over the next 12 years.
First, there are evaluation levels. Husman’s go-to measure is the market capitalization of non-financial stocks divided by the total value added of those stocks. This index has surpassed the biggest bubble peak in history and is at an all-time high.
Hussman Fund
Husman likes this method because it predicts market returns over a 12-year period fairly accurately compared to 10-year Treasury returns. The relationship between expectations and actual market returns is: Current expectations are that the S&P 500 index is expected to underperform U.S. Treasuries by 9.9% per year over the next 12 years.
Hussman Fund
There’s also investor sentiment, which Husman measures through the uniformity of the movements of thousands of securities. The chart below shows that when the index goes sideways, as it did in 2000 and 2008, it is historically bad for stock prices.
Hussman Fund
Finally, warning signs of market overexpansion are accumulating, comparable to previous major recessions. The individual red flags Hussman watches for are that while the S&P 500 is within 2% of its five-year high, fewer than 72% of stocks are below their 200-day moving average, and 2.5% of stocks are both new. Various technical indicators such as updating values. – Weekly highs and lows at the same time, among other conflicting signals.
Hussman Fund
Mr. Hussmann’s achievements and his views behind them
Hussmann’s outlook is often seen as extreme, and perhaps quite so. But the valuations have sparked skepticism about future market returns among others on Wall Street, if not to the same extent.
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Earlier this week, Goldman Sachs predicted that the S&P 500 index would average an annual return of 3% over the next 10 years. This is lower than the 4.2% annual yield on risk-free 10-year U.S. Treasuries.
It’s also worth remembering that Hussmann’s outlook is only for 12 years if you buy now, not if you plan to hold for decades.
For the uninitiated, Hussman has repeatedly made headlines for predicting stock market declines of over 60% and predicting negative stock returns for an entire decade. And while the stock market was all but rising, he continued to advocate doomsday thinking.
But before you dismiss Hussman as a whiny perpetual bear, consider his track record again. The argument he advanced was as follows.
In March 2000, he predicted that tech stocks would fall 83%, and since then the tech-heavy Nasdaq 100 index has fallen 83% from 2000 to 2002 with “impossible accuracy.” In 2000, he predicted that the S&P 500 index would probably go negative. In April 2007, he predicted that the S&P 500 index could fall 40%, followed by a 55% decline in the 2007-2009 crash.
But Hussmann’s recent gains haven’t been all that impressive. His Strategic Growth Fund has fallen about 55% since December 2010 and 16% in the past 12 months. By comparison, the S&P 500 index is up about 39% over the past year.
The amount of bearish evidence Hussman has unearthed continues to grow, and his claims for a deep drop over the past few years are starting to prove accurate in 2022. Yes, there may still be returns to be realized in this new bull market. But at what point does the risk of a major crash increase and become untenable?
This is a question that investors will have to answer for themselves, and one that Husman will continue to explore for some time to come.
